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Hi John
My answer for the option profit is different from the ACCA answer.
My workings are as below:
Sell future at 9400 and buy at 9300. There is zero basis risk as my spot is 9400 which is also the same as my exercise price of March future option at 9400.
when interest rise by 100 basis point:
My option profit is [(94.00-93.00)/4] x 80 x 500,000 = $100,000.In the ACCA answer, they buy the future at 92.96. [this is the part i) price where the future close price, but not for ii)]
Please advise. Thanks.
The basis is the difference between the current spot rate and the current price of the future (nothing to do with the exercise price of the option).
When the date comes to consider the exercising of the option (which is the option to buy or sell a future), then the basis will have changed (it falls linearly over the life of the future). When you have estimated what the price of the future will be, then the profit is the difference between the exercise price and the futures price.
(If it is not a profit but a loss, then you will not exercise the option)Hi John
Sorry, I had meant that I had choosen the March Future with the future price of 9400. I am puzzled why In the ACCA answer, they buy the future at 92.96. [this is the part i) price where the future close price, but not for ii)]
Thanks
But the futures prices in the question are ‘today’s’ prices.
You are not buying or selling any futures today – that only happens if and when you exercise the option. By that date the futures prices will have changed.
There is a basis today – the difference between todays futures price and todays spot – will fall over the period, which is where the 92.96 came from.
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